Deck 19: Options

Question 1

Suppose you bought 10 Smith Enterprise put options with a strike price of $52 at $2.75 per option.If the price of Smith stock is $48,what is your net profit (or loss)? Ignore transaction costs.

A) $40
B) $0
C) $12.50
D) -$27.50

Answer 1

$12.50

Question 2

A put option with a $50 strike price on Bavarian Sausage stock will expire in one year.If you know a call on the same stock has a value of $2.75,that the price of the put is $1.26 and the stock is currently selling at $47,what is the implied risk free rate?

A) 4.56%
B) 3.07%
C) 5.43%
D) 9.87%

Answer 2

9.87%

Question 3

The price at which the owner of an option can buy or sell the underlying asset is called the

A) market price
B) liquidation value
C) strike price
D) intrinsic value

Answer 3

strike price

Question 4

The option that gives the owner the right to buy an asset at a fixed price at or before a certain date is called a

A) put option
B) call option
C) parity option
D) swaption

Question 5

A put option with a $50 strike price on Bavarian Sausage stock will expire in one year.If you know that the risk free rate is 4%,that the stock currently sells at $47 and the call on the same stock has a value of $2.75,what is the price of the put?

A) $4.67
B) $2.75
C) $3.83
D) $1.56

Question 6

Suppose you bought 10 Smith Enterprise put options with a strike price of $52 at $2.75 per option.If the price of Smith stock is $56,what is your net profit (or loss)? Ignore transaction costs.

A) $40
B) $0
C) -$27.50
D) $12.50

Question 7

Suppose you bought 10 Smith Enterprise call options with a strike price of $52 at $2.75 per option.If the price of Smith stock is $56,what is your net profit (or loss)? Ignore transaction costs.

A) $0
B) $12.50
C) -$27.50
D) $40

Question 8

Smith Enterprises stock currently sells for $17.50.A put option on the stock has a strike price of $20 and currently sells at $4.50.What is the intrinsic value of the option?

A) $0
B) $2.50
C) $2.00
D) $4.50

Question 9

A call option with a $50 strike price on Bavarian Sausage stock will expire in one year.If you know that the risk free rate is 4%,that the stock currently sells at $47 and the put on the same stock has a value of $2.75,what is the price of the call?

A) $2.75
B) $3.56
C) $1.67
D) $5.36

Question 10

Smith Enterprises stock currently sells for $17.50.A call option on the stock has a strike price of $20 and currently sells at $4.50.What is the time value of the option?

A) $0
B) $2.50
C) $2
D) $4.50

Question 11

Smith Enterprises stock currently sells for $17.50.A call option on the stock has a strike price of $15 and currently sells at $4.50.What is the time value of the option?

A) $2.50
B) $0
C) $2.00
D) $4.50

Question 12

An option that gives the owner the right to buy or sell an asset at a fixed price only on the expiration date,is called a(n)

A) European option
B) American option
C) Asian option
D) exotic option

Question 13

Suppose you bought 10 Smith Enterprise call options with a strike price of $52 at $2.75 per option.If the price of Smith stock is $50,what is your net profit (or loss)? Ignore transaction costs.

A) $0
B) -$27.50
C) $27.50
D) $500

Question 14

When a call option's strike price is less than the current price of the underlying asset,the call is said to be

A) at the money
B) in the money
C) out of the money
D) worthless

Question 15

Smith Enterprises stock currently sells for $17.50.A call option on the stock has a strike price of $20 and currently sells at $4.50.What is the intrinsic value of the option?

A) $0
B) $2.50
C) $2.00
D) $4.50

Question 16

Smith Enterprises stock currently sells for $17.50.A call option on the stock has a strike price of $15 and currently sells at $4.50.What is the intrinsic value of the option?

A) $0
B) $2.50
C) $4.50
D) $1.25

Question 17

Smith Enterprises stock currently sells for $17.50.A put option on the stock has a strike price of $15 and currently sells at $4.50.What is the intrinsic value of the option?

A) $0
B) $2.50
C) $4.50
D) $1.25

Question 18

According to the Black and Scholes option pricing model,which of the following will lead to an increase in the value of a call option?

A) the price of the underlying asset decreases
B) the risk free rate increases
C) the time to expiration decreases
D) none of the above

Question 19

Smith Enterprises stock currently sells for $17.50.A put option on the stock has a strike price of $20 and currently sells at $4.50.What is the time value of the option?

A) $0
B) $2.50
C) $2
D) $4.50

Question 20

Smith Enterprises stock currently sells for $17.50.A put option on the stock has a strike price of $15 and currently sells at $4.50.What is the time value of the option?

A) $0
B) $2.50
C) $4.50
D) $2.00

Question 21

You purchase a call option and a put option on the shares of a company.The sticker price and expiration date for the options is equal.What is the best description of the combined payoff diagram for the combination of the two options?

A) an upward sloping straight line
B) a downward sloping straight line
C) a v-shaped diagram with the kink at the strike price of the options
D) an upside down v-shaped diagram with the kink at the strike price of the options

Question 22

You own 100 shares of a stock with a current price of $50 and you also own a put option of 100 shares of the stock with a strike price of $45.What is the minimum value of your portfolio at expiration? Ignore the original cost of the put option for your calculation.

A) $50
B) $45
C) $5
D) $0

Question 23

Bavarian Brew issued convertible bonds with a par value of $1,000.The conversion ratio on the bonds is 12.33,the current market price of the bonds is $933.75 and the underlying stock currently sells at $45.25.What is the conversion premium?

A) 66.48%
B) 45.25%
C) 74.67%
D) 27.58%

Question 24

You need to immediately purchase 100 shares of Stock X and you own a call option with a strike price of $32.The current price of Stock X is $25.Your best course of action is

A) to exercise your call option at price of $32.
B) to purchase a new call option with a strike price of $25 and exercise it.
C) to purchase the stock in the market at a price of $25.
D) none of the above.

Question 25

If you purchase the right to sell a share of IBM stock for a set price for a fixed period of time,then you have

A) sold a call option.
B) purchased a call option.
C) purchased a put option.
D) sold a put option.

Question 26

You own a put option on a stock and the strike price of the option is $30.The option has 3 weeks until expiration and the stock is currently priced at $35 per share.What is the largest payout possible for this put option? Ignore the original cost of the option for the payout calculation.

A) $0
B) $5
C) $30
D) the payout is unlimited

Question 27

A call option with a $35 strike price on Bavarian Sausage stock will expire in one year.If you know that the risk free rate is 6%,that the stock currently sells at $38 and the put on the same stock has a value of $3.85,what is the price of the call?

A) $3.85
B) $6.26
C) $7.34
D) $8.83

Question 28

You notice that the price of a one-year call option,with a $40 strike price,is $5.The current price of the underlying stock is also $40.What should the price of a one-year put option be with a strike price of $40? Assume that the interest rate on a one-year risk free bond is 10%.

A) $5
B) $0
C) $1.36
D) $8.63

Question 29

One of the main reasons for the name "derivatives" is that

A) the value of the underlying instrument derives its value from the derivative instrument.
B) the instruments derive their value from the value of other instruments.
C) calculus is required to convert their market price to a dollar price.
D) none of the above.

Question 30

You sold a call option on a stock and the strike price of the option is $30.The option has 3 weeks until expiration and the stock is currently priced at $35 per share.You originally sold the call option for $3.What is the largest payout possible total payout to you for this call option?

A) $0
B) $3
C) $5
D) $30

Question 31

You notice that you can purchase an option for $5.The price of the underlying stock is currently $42.What is the option premium for this option?

A) $5
B) $37
C) $42
D) $47

Question 32

An option that gives the holder the right to purchase an underlying security only at the end of a fixed period for a fixed price is an

A) American call option.
B) American put option.
C) European call option.
D) European put option.

Question 33

A put option with a $35 strike price on Bavarian Sausage stock will expire in one year.If you know that the risk free rate is 6%,that the stock currently sells at $38 and the call on the same stock has a value of $6.85,what is the price of the put?

A) $6.85
B) $1.87
C) $3.00
D) $0

Question 34

You find that an investor purchases a put option on shares of Company Z stock.What is the most likely reason that an investor would make such a purchase?

A) the investor believes that Company Z is an undervalued company
B) the investor believes that Company Z in an overvalued company
C) the investor would like to speculated that Company Z's stock price will randomly increase
D) none of the above

Question 35

A put option with a $35 strike price on Bavarian Sausage stock will expire in one year.If you know that the stock currently sells at $38 that the put on the same stock has a value of $6.85,and the value of the call is $11.87,what is the implied risk free rate?

A) 3.57%
B) 5.39%
C) 8.27%
D) 6.12%

Question 36

Bavarian Brew issued convertible bonds with a par value of $1,000.The conversion ratio on the bonds is 12.33,the current market price of the bonds is $933.75 and the underlying stock currently sells at $35.25.What is the conversion price?

A) $33.25
B) $75.73
C) $54.36
D) $12.33

Question 37

You own a call option on a stock and the strike price of the option is $30.The option has 3 weeks until expiration and the stock is currently priced at $35 per share.What is the largest payout possible for this call option? Ignore the original cost of the option for the payout calculation.

A) $0
B) $5
C) $30
D) there is an unlimited possible payout on this option

Question 38

If a company is wanting to lessen the cost of a new security by imbedding a valuable option in the security,then the company is most likely to issue

A) common stock.
B) debt.
C) convertible debt.
D) preferred stock.

Question 39

Which of the following will increase in price as the value of the underlying asset decreases in price,from the option holder's perspective?

A) call option
B) put option
C) a long future position.
D) none of the above.

Question 40

You currently own a put option on Stock X with a strike price of $25.If the current price of Stock X is $30,then what is the in-the-money amount of the option?

A) -$5
B) $0
C) $5
D) none of the above

Question 41

ABC stock is currently trading at $28.A call option on ABC with a strike price of $30 and 3 months to expiration trades for $2.75.In order for the option to be considered in the money at expiration,ABC stuck must:

A) be greater than $30.75
B) be greater than $32.75
C) be greater than $30
D) be less than $27.25

Question 42

An investor that purchases a put option on ABC stock is hoping that ABC stock will:

A) fall below the put strike price at expiration.
B) rise above the put strike price at expiration.
C) equal the put strike price at expiration.
D) none of the above

Question 43

When managers of a firm are compensated in options,managements interests may not be aligned with that of shareholders because

A) managers may have incentives to increase the riskiness of the firm.
B) managers would rather be paid in cash.
C) the taxes that are paid on the option compensation buffer that form of compensation from being aligned with the shareholders interests.
D) none of the above.

Question 44

An investor purchases 2 call options on XYZ stock with a strike price of $50.The call premium is $2.65 each.The investor will breakeven at expiration if the stock price of XYZ is:

A) $50
B) $47.35
C) $55.30
D) $52.65

Question 45

You have written a call option on 1 share of Z stock that is currently worth $15.You expect the price of the stock to either move to $20 or $10 over the next year.If the one-year risk-free interest rate is 10% and the strike price on the option is $15,what should have been the proceeds of the option?

A) $5.45
B) $2.95
C) $.45
D) $0

Question 46

Kenly Bennett XIV wants to short shares of Axline Industries.However his broker can not find shares available to short.To synthetically produce a short strategy on Axline Industries,Kenly could

A) Buy a put,sell a zero coupon bond with a face value equal to the strike price of the put and the call,and sell a call.
B) Buy a put,sell a zero coupon bond with a face value equal to the strike price of the put and the call,and buy a call.
C) Sell a put,buy a zero coupon bond with a face value equal to the strike price of the put and the call,and sell a call.
D) Buy a put,buy a zero coupon bond with a face value equal to the strike price of the put and the call,and sell a call.

Question 47

An investor that writes a covered call

A) receives a premium for the option he sells.
B) speculates that the stock price will increase above the strike price
C) benefits if the stock price increases above the strike price.
D) pays a premium to the call seller for downside protection on his stock

Question 48

You have written a call option on 1 share of Z stock that is worth $15.You expect the price of the stock to either move to $20 or $10 over the next year.How many shares of Z stock should you own to perfectly hedge your position on the call option? The strike price on the option is $15.

A) 2 shares
B) 1 share
C) .5 shares
D) none of the above

Question 49

Which of the following is issued by the firm that grants investors the right to buy shares of stock at a fixed price,for a given period of time?

A) stock futures
B) put options
C) warrants
D) none of the above

Question 50

You have written a call option on 1 share of A stock that is currently worth $30.You expect the price of the stock to either move to $40 or $20 over the next year.If the one-year risk-free interest rate is 5% and the strike price on the option is $25,what should have been the proceeds of the option?

A) $15.72
B) $8.22
C) $.72
D) $0

Question 51

The main difference between an American and a European option is that

A) European options are priced in Euros and American options are priced in dollars.
B) American options can be exercised at any time until expiration while European options can only be exercised on expiration date
C) European options can be exercised at any time until expiration while American options can only be exercised on expiration date
D) American options are standardized contracts while European options are not.

Question 52

An investor that purchases a call option on XYZ stock,is hoping that XYZ stock price will:

A) be below the strike price at expiration
B) be above the strike price at expiration
C) be equal to the strike price at expiration
D) none of the above

Question 53

A put on United Pipeline has 1 year to maturity and a strike price of $45.If an investor purchases that option for $3.25 then in order for the investor to break even,United Pipeline's stock price on the expiration date must equal

A) $45
B) $48.25
C) $41.75
D) none of the above

Question 54

You notice that the price of a one-year put option,with a $60 strike price,is $1.The current price of the underlying stock is also $58.What should the price of a one-year call option be with a strike price of $60? Assume that the interest rate on a one-year risk free bond is 10%.

A) $0
B) $2
C) $2.45
D) $4.45

Question 55

You need to find the price of a European call option on a stock that does not pay dividends.The current price of the shares are $100 and the strike price on the option is $80.The expiration date is 9 months from now and the risk-free rate applicable is 8% per annum.If the standard deviation on the returns on the stock is 50%,what is the price of a single call option?

A) $19.71
B) $27.20
C) $30.39
D) $36.65

Question 56

An investor that writes a naked call could be considered:

A) bullish
B) bearish
C) neutral
D) risk averse

Question 57

You need to find the price of a European call option on a stock that does not pay dividends.The current price of the shares are $50 and the strike price on the option is $50.The expiration date is 3 months from now and the risk-free rate applicable is 10% per annum.If the standard deviation of the returns on the stock is 20%,what is the price of a single call option?

A) $6.53
B) $2.91
C) $2.65
D) $2.00

Question 58

Which of the following will cause a decrease in the value of the respective derivative?

A) an increase in volatility for a call option
B) a decrease in volatility for a call option
C) an increase in the length to expiration for a call option
D) an increase in the length to expiration for a put option

Question 59

According to the Black-Scholes option pricing model which of the following has the effect of decreasing the value of a call option?

A) an increase in the stock price
B) a higher strike price
C) an increase in the standard deviation of the underlying asset price returns
D) an increase in the risk-rate

Question 60

Which of the following conditions must be met in order for put - call parity to hold.

A) The call and put options must be on the same underlying stock
B) The call and put options must have the same expiration date
C) Both options should be European options
D) All of the above

Question 61

Jimmy Campbell is looking to buy put options on Hawkwood Corporation.Currently Hawkwood Corp.stock is trading at $40 per share.The put options that he is considering buying have a strike price of $45.These put options are

A) in-the-money
B) American options
C) out-of-the money
D) European options

Question 62

Hannah Monstz is looking to purchase a call option on Thomas Co.,which is currently trading at $35.The call option has a strike price of $32.50 and has 6 months to expiration.If the options has a premium of $5,what is Hannah's maximum loss on the position?

A) $5
B) $2.50
C) $32.50
D) $35

Question 63

Rico Pagano holds the stock of Nosbitzh & Company.Pagano is concerned that over the next 6 months the stock of Nozbitzh & Co.may fall by 20%.To protect the value of his position,Pagano could

A) sell a naked call
B) buy a protective put
C) sell a protective put
D) buy a call

Question 64

Drewfus Corp.is currently trading at $30.Call options with a strike price of $25 and 6 months to expiration are trading at $7 and call options with a strike price of $35 and 6 months to expiration are trading at $2.If Investor Andy Reutter buys a $25 call and simultaneously sells a $35 call what is his maximum gain on the position.

A) $10
B) unlimited
C) $3
D) $5

Question 65

Ryan T.Gates buys a call option on Hoste Enterprise for $3.The call option has a strike price of $35 and 6 months to expiration.If the price of Hoste Enterprise is $33 in 6 months how much is the call option worth at expiration.

A) $3
B) $2
C) $-2
D) $0

Question 66

Kimball Johnson has just purchased a put option on Reut Corporation which currently trades at $58 per share.The put option has a strike price of $50,6 months until expiration,and trades at a premium of $3.What is the breakeven price for Johnson's put option.

A) $47
B) $53
C) $55
D) $61

Question 67

Bill Henricksen,purchased a put option on Cycle Inc.for $4.The put option has a strike price of $40 and currently Cycle Inc.shares trade for $44.The expiration date of the option is 6 months from today.What is Henricksen's maximum gain on his put option?

A) $4
B) $36
C) $40
D) $44

Question 68

Meri Beth Rank believes that stock of Opp & Company is going to be extremely volatile over the next month.Meri Beth expects the stock to move by 50% but she is not sure whether the stock of Opp & Company will rise or fall.A possible strategy that Meri Beth could employ to profit from her expectation is

A) a long straddle
B) a short straddle
C) a short call
D) a short put

Question 69

Stanley Saeli is an investor who is bullish on LSL Corporation.Currently,LSL Corp.is trading at $51.To profit from his position,Saeli decides to sell put options on LSL Corp.that have a strike price of $45 and 1 year until expiration.The premium that he would receive on the option is $2.50.What is the most that Saeli can expect to gain per put option?

A) $6
B) $45
C) $2.50
D) $42.50

Question 70

Which of the following option positions has a loss potential that is unlimited.

A) a long call
B) a naked short call
C) a short put
D) a long straddle

Question 71

Shares of Beech Brewery,Inc.trade at $35.Call options with a strike price of $30 trade for $7.50.The options have 1 year until expiration and the risk free rate is 4%.According to put - call parity what should be the price of a $30 put option on Beech Brewery with one year to expiration.

A) $6.15
B) $6.36
C) $1.35
D) $11.15

Question 72

Thomas Duckworth owns and operates Stones Asset Management.The firm manages $10 billion in assets and focuses on exploiting arbitrage opportunities.Duckworth uses put - call parity to price put and call options.According to his put - call parity analysis Duckworth realizes that puts with a strike price of $30 and 1 month remaining until expiration on Medusa's Inc.should be priced at $2.30.However he realizes that the $30 puts are trading for $2.75 in the open market.How should Duckworth exploit this arbitrage opportunity?

A) sell the puts in the open market,buy Medusa's stock,short a zero coupon bond with a face value of $30 and maturity of 1 month,and buy a 1 month call with a strike price of $30
B) buy the puts in the open market,short Medusa's stock,short a zero coupon bond with a face value of $30 and maturity of 1 month,and buy a 1 month call with a strike price of $30
C) sell the puts in the open market,lend $30 at the risk free rate,buy a 1 month $30 call on Medusa's,and short the underlying stock.
D) buy a zero coupon bond with a face value of $30 and maturity of 1 month and buy a 1 month call with a strike price of $30

Question 73

All of the following options are call options on Nixon Industries,which currently is trading at $35.They all have the same expiration date.Which of the following options should trade at the highest price.

A) A call option with a strike price of 20
B) A call option with a strike price of 30
C) A call option with a strike price of 40
D) A call option with a strike price of 50

Question 74

An investor who employs a short straddle strategy is hoping that the underlying stock price

A) is extremely volatile
B) is stable
C) trends above the strike price of the options
D) trends below the strike price of the options

Question 75

A call option on Dani Corp.is trading for $4.50.The strike price of the option is $25 and it has an expiration of 3 months.If the stock of Dani Corp.is trading at $28,how much of the option premium is attributed to intrinsic value?

A) $1.50
B) $3.00
C) $25
D) $28

Question 76

Lauri Mazurek buys a call option on Piede Inc.Currently Piede Inc.trades at $65 per share.The call option she buys has a strike price of $70 and has a premium of $4.What is Mazurek's breakeven price?

A) $66
B) $70
C) $69
D) $74

Question 77

Which of the following factors will affect the price of an option?

A) The strike price of the option
B) The amount of time until expiration
C) The price of the underlying stock
D) All of the above

Question 78

All of the following options are put options with 9 months to expiration on Mac Industries.Which of the following options should trade at the lowest premium?

A) A put option with a strike price of 65
B) A put option with a strike price of 55
C) A put option with a strike price of 40
D) A put option with a strike price of 45

Question 79

Jim Lemke purchases a put option on Roofus Corp.for $3.50.The put option has a 1 year expiration and a strike price of $35.Currently Roofus Corp.is trading at $38.What is Lemke's maximum loss on the put option?

A) $38
B) $35
C) $3.50
D) $31.50

Question 80

Which of the following would affect the premium of a call option?

A) interest rates
B) dividend yield
C) stock price volatility
D) all of the above